If you're not quite ready to buy, yet know you will be in a year or two, the "Rent to Own" program may be the perfect strategy.
If you’re like most home buyers, you’ll need a mortgage to finance the purchase of a new house. To qualify, you must have a good credit score and cash for a down payment. Without these, the traditional route to homeownership may not be an option.
There is an alternative, however: a "rent-to-own" agreement, in which you rent a home for a certain amount of time, with the option to buy it before the lease expires. Rent-to-own agreements consist of two parts: a standard lease agreement and an option to buy.
If want to buy the property, you’ll probably need to obtain a mortgage (or other financing) in order to buy the property in full. Conversely, if you decide not to buy the house – or are unable to secure financing by the end of the lease term – the option expires and you may:
With the "Rent to Own" program you will be responsible for maintaining the property and paying for repairs. Though it will still be the responsibility of Sturdy Foundations to pay for any homeowner association fees, taxes and insurance (as we still own the home until you purchase it), you will still need a renter’s insurance policy to cover losses to personal property and provide liability coverage if someone is injured while in the home or if you accidentally injure someone.
***Maintaining the property – e.g., mowing the lawn, raking the leaves and cleaning out the gutters, replacing any damages or inoperable provided appliances, etc.
A rent-to-own agreement can be an excellent option if you’re an aspiring homeowner but aren’t quite ready, financially speaking. These agreements give you the chance to get your finances in order, improve your credit score and save money for a down payment while “locking in” the house you’d like to own. Additionally, you also get to build some equity as the option money and a percentage of the rent goes toward the purchase price .
While rent-to-own agreements have traditionally been geared toward people who can’t qualify for conforming loans, there’s a second group of candidates who have been largely overlooked by the rent-to-own industry: people who can’t get mortgages in pricey, nonconforming loan markets such as Hawaii. “In high-cost urban real estate markets, where jumbo [nonconforming] loans are the standard, there is a large demand for a better solution for financially viable, credit-worthy people who can’t get or don’t want a mortgage yet,” says Marjorie Scholtz, founder and CEO of Verbhouse, a San Francisco–based start-up that’s redefining the rent-to-own market.
“As home prices rise and more and more cities are priced out of conforming loan limits and pushed into jumbo loans, the problem shifts from consumers to the home finance industry,” says Scholtz. With strict automatic underwriting guidelines and 20% to 40% down-payment requirements, even financially capable people can have trouble obtaining financing in these markets.
“Anything unusual – in income, for example – tosses good income earners into an ‘outlier’ status because underwriters can’t fit them neatly into a box,” says Scholtz. This includes people who have nontraditional incomes, are self-employed or contract workers, or have unestablished U.S. credit (e.g., foreign nationals) – and those who simply lack the huge 20% to 40% down payment banks require for nonconforming loans.
High-cost markets are not the obvious place you'll find rent-to-own properties, which is what makes Sturdy Foundations so unique.: The option fee and a portion of each rent payment buy down the purchase price dollar-for-dollar, the rent and purchase price are locked in for up to two years (negotiable), and participants can build equity and capture market appreciation, even if they decide not to buy. Participants can “cash out” at the fair market value: Sturdy Foundations can sell the home and you (the participant) keep the market appreciation plus any equity you’ve accumulated through rent “buy-down” payments.
1. Pay Option Money is Required
In a "rent-to-own" agreement, you (as the buyer) pay a one-time, nonrefundable, upfront fee called the option fee. This fee is what gives you the option to buy the house by a certain date in the future. The option fee is 10% of the purchase price, however, In some cases this fee is negotiable. The good news, the option fee will be applied to the purchase price at closing.
2. Read the Contract Carefully: Lease Option vs. Lease Purchase
It’s important to note that there are different types of rent-to-own contracts, with some being more consumer friendly and flexible than others. At Sturdy Foundations, we use a Lease Option contract; this gives you the right – but not the obligation – to buy the home when the lease expires. If you decide not to buy the property at the end of the lease, the option simply expires, and you can walk away without any obligation to continue paying rent or to buy.
We caution you to watch out for Lease-Purchase contracts. With these you could be legally obligated to buy the home at the end of the lease – whether you can afford to or not. To have the option to buy without the obligation, it needs to be a lease-option contract. Because legalese can be challenging to decipher, it’s always a good idea to review the contract with a qualified real estate attorney before signing anything, so you know your rights and exactly what you’re getting into.
3. Specific Purchase Price
Our Rent-to-own agreements specify when and how the home’s purchase price is determined. Together we agree on a purchase price when the contract is signed – keep in mind this is often at a higher price than the current market value based on Hawaiian historical equity statistics. We have found that many buyers prefer to “lock in” the purchase price, especially in the Hawaii market where home prices are constantly trending up.
4, What does Your Rent Buy?
You’ll pay rent throughout the lease term. A 15% portion of each payment is applied to the eventual purchase price ( however, if you decide not to purchase the home, that 15% is non-refundable). For an example, if you pay $2,900 in rent each month for two years, and 15% of that is credited toward the purchase, you’ll earn a $10,440 rent credit ($2,900 x 0.15 = $435; $435 x 24 months = $10,440).
A rent-to-own agreement allows would-be home buyers to move into a house right away, with several years to work on improving their credit scores and/or saving for a down payment before trying to get a mortgage. Of course, certain terms and conditions must be met, in accordance with the rent-to-own agreement.